US equities have performed strongly over the past 12 months and markets, helped by supportive monetary policy and company share buybacks, reached fresh highs after corporate earnings once more outpaced forecasts in the third quarter. This has been in contrast with the often-disappointing performance of many other equity markets.
We have, however, been steadily reducing our exposure to the US. There are good reasons to be positive on the prospects for the US economy but these are to a large degree already priced into valuations and it will be no easy task for companies to continue to beat earnings forecasts. We also believe the stronger dollar will act as a headwind for US-listed multinationals.
At a strategic level we have long believed market capitalisation may not be the most effective long-term basis for asset allocation decisions. Using the potential for GDP growth is, in our view, a superior method of determining these allocations. This too has led us to have a lower allocation to the US in comparison with many of our peers and to have a greater exposure to Asian equities.
Japan continues to divide opinion but we believe patient investors will be rewarded. This is, after all, the world’s third largest economy by nominal GDP and Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda have displayed an impressive commitment to breathing new life into the economy.
The possibility of a further weakening of the yen as a form of “competitive devaluation”, when what is required is structural reform, remains a concern. Such a move would further stoke tensions with Japan’s neighbours and the increased competitiveness of its exports would act as a headwind to recovery in Europe. On balance, though, we believe Japan continues to present an attractive opportunity for investors.
Switching the focus from specific geographical allocations to a more thematic approach, we continue to see potential among the growing number of funds that pursue investment opportunities on a global basis, rather than being confined to a particular country or region.
Healthcare is a good example of this, with increasing demand for a broad range of services fuelled by ageing populations around the globe, including many developing nations where levels of wealth are increasing.
The spring sell-off of biotech stocks brought a degree of volatility but we believe the broader healthcare sector remains a strong long-term opportunity.
Technology is another attractive global theme and we have recently taken a position in the Guinness Global Innovators fund, which has a strong track record in the US and is now available in the UK.
Technology is an important focus for the fund but the strategy is wider. The managers seek to identify companies across a diverse range of industries positioned to benefit from innovations in areas including management strategy and communications, as well as technology.
It is an interesting approach and one that fits well with our preference for index-agnostic conviction managers who are sharply focused on returns.
Elliot Farley is co-manager of the T. Bailey Growth, Dynamic and Defensive funds